China Economic Collapse: This Should Keep Investors Up at Night

By Gaurav S. Iyer, IFC Published : October 7, 2015

Chinese Investors Are Doing Some Strange Things in the U.S. Housing Market

Just months after China’s stock market crash, data on the U.S. housing market shows that tons of Chinese investors are pouring cash into U.S. real estate. The rapid influx of capital into U.S. housing comes at a time when the country could be on the verge of economic collapse.

China’s new class of wealthy investors are uneasy about an economic slowdown in their homeland. They are increasingly agitated by the government’s ham-fisted response to the stock market crash. (Source: Chinese money flows into U.S. housing, CNBC, October 6, 2015.)

Driven by fear and a need for return, these wealthy individuals are looking for any way to get rid of their yuan. One of the strategies is to buy into the U.S. housing market.

Wealthy Chinese investors are buying more assets in the U.S. housing market than ever before. More than a third of all foreign purchases of American real estate came from China. They spent roughly $28.0 billion in the 12 months preceding March 2015.

Moreover, nearly half of these Chinese investors are paying in cash. They’ve swapped their yuan for cold, hard dollars to break into the U.S. housing market.

Weakened Yuan Sends Investors to U.S. Housing Market

Analysts believe concerns over China’s near-term economic future are driving investors to the U.S. housing market.

Its economic growth over the last 20 years has passed into legend, leading many to believe China is impervious to failure, but falling exports and investment are slowing down China’s economy. The country is vulnerable.

China is trying desperately to escape what economists call the “middle income trap.” When developing nations are transitioning into high-income countries, they must execute a finely-tuned economic pivot.

To escape the middle income trap China must convince its citizens to consume more. It becomes important as nations get wealthier, for their citizens to see a better quality of life. Otherwise, economic growth would simply be an exercise of vanity.

China is no different. Growth in the Chinese economy has far outpaced growth in Chinese living standards. The emerging middle class must spend more. That is the only way to finance the next chapter of growth.

But people are slow to abandon frugality when it is all they’ve ever known.